A Day of Economic Reckoning Nears

Are we slipping into a recession or not? We may find out soon. It is tough to underestimate how closely economists will be watching Friday's jobs report and ISM report on manufacturing. Economist Mark Vitner of Wachovia will certainly be tuned in:

If we are right and the weather was a major factor in depressing the December economic data, we could be set for a monumental turnaround beginning in the next few days. The consensus forecast for January's ISM report ... calls for an additional 0.5 percentage point drop.... The combination of colder and wetter weather in December and a fairly mild to typical January could set us up for a surprisingly strong number. If the ISM rises back above 50, any talk of the U.S. economy already being in recession should subside considerably.... We will also get the January 2008 employment report on Friday morning. The consensus is calling for a modest gain of around 65,000 new jobs and no change in the unemployment rate. Our own forecast calls for a gain of 110,000 jobs, and there is plenty of potential for an upside surprise. First-time claims for unemployment insurance have fallen in each of the past four weeks and remain unusually low at just 301,000 in the most recent week. The latest claims data are consistent with strong job growth but have been summarily dismissed because they seem so out of sorts with everything else we heard about the month of January.... If the claims data prove accurate, however, and we get a stronger-than-consensus nonfarm job gain, the recession trade will begin to unwind, sending stock prices and bond yields notably higher.